Page 2 :
LEARNING OBJECTIVES, To understand the concept of marginal costing, To learn the features, advantages and disadvantages of marginal costing, To calculate marginal cost, contribution, PE Ratio, etc.
Page 3 :
Introduction – Marginal Costing:, At any given level of output, additional output can normally be obtained at less than proportionate cost per unit. , This is because the aggregate of certain items of cost will tend to remain fixed and only the aggregate of the remainder (variable Cost) will tend to rise proportionately with increase in output. , Conversely, a decrease in the volume of output will normally be accompanied by a less than proportionate fall in the aggregate cost.
Page 4 :
Introduction – Marginal Costing:, Therefore, costs should be analysed into variable and fixed components, for meaningful decision-taking. This theory, which recognizes the difference between variable and fixed costs, is called Marginal Costing.
Page 5 :
Meaning and Definition of Marginal Costing, It is technique of decision making, which involves:, (a) Ascertainment of total costs, (b) Classification of costs into - (1) Fixed and (2) Variable, (c) Use of such information for analysis and decision making.
Page 6 :
Meaning and Definition of Marginal Costing, Marginal costing is defined by I.C.M.A. as “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs.
Page 7 :
Meaning and Definition of Marginal Costing, Thus, Marginal costing is defined as the ascertainment of marginal cost and of the ‘effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs., Marginal costing is mainly concerned with providing information to management to assist in decision making and to exercise control., Marginal costing is also known as ‘variable costing’ or ‘out of pocket costing’.
Page 8 :
Meaning and Definition of Marginal Costing, The technique of marginal costing is based on the distinction between product costs and period costs. , Only the variable costs are regarded as the costs of the products while the fixed costs are treated as period costs which will be incurred during the period regardless of the volume of output.
Page 9 :
Assumptions of Marginal Costing:, The technique of marginal costing is based upon the following assumptions:, a. All elements of cost—production, administration and selling and distribution—can be segregated into fixed and variable components., b. Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuates directly in proportion to changes in the volume of output., c. The selling price per unit remains unchanged or constant at all levels of activity.
Page 10 :
Assumptions of Marginal Costing:, d. Fixed costs remain unchanged or constant for the entire volume of production., , e. The volume of production or output is the only factor which influences the costs.
Page 11 :
Features / Characteristics of Marginal Costing, 1. Cost Classification: The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm., 2. Managerial Decisions: It is a technique of analysis and presentation of costs which help management in taking many managerial decisions such as make or buy decision, selling price decisions etc.
Page 12 :
Features / Characteristics of Marginal Costing, 3. Inventory Valuation: Under marginal costing, inventory for profit measurement is valued at marginal cost only., , 4. Price Determination: Prices are determined on the basis of marginal cost by adding contribution which is the excess of selling price over variable costs of sales.
Page 13 :
Features / Characteristics of Marginal Costing, 5. Contribution: Marginal costing technique makes use of Contribution for taking various decisions. Contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments.
Page 14 :
Advantages of Marginal Costing:, 1. Simple and Easy: It is very simple to understand and easy to operate., , 2. Helpful in Cost Control: Marginal costing divides total cost into fixed and variable cost. Marginal costing by concentrating all efforts on the variable costs can control total cost., , 3. Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs.
Page 15 :
Advantages of Marginal Costing:, 4. Evaluation of Performance: The different products and divisions have different profit earning potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector., , 5. Helpful in Decision Making: It is a technique of analysis and presentation of costs which help management in taking many managerial decisions such as make or buy decision, selling price decisions, Key or limiting factor, Selection of suitable Product mix etc.
Page 16 :
Advantages of Marginal Costing:, 6. Production Planning: It helps the management in Production planning. The effect of alternative production policy can be readily available and decision can be taken that would yield the maximum return to Business., , 7. It removes the complexities of under-absorption of overheads., , 8. The distinction between product cost and period cost helps easy understanding of marginal cost statements.
Page 17 :
Advantages of Marginal Costing:, 9. It is a valuable aid to management for decision-marking and fixation of selling prices, selection of a profitable product/sales mix, make or buy decision, problem of key or limiting factor, determination of the optimum level of activity, close or shut down decisions, evaluation of performance and capital investment decisions, etc., 10.It facilitates the study of relative profitability of different product lines, departments, production facilities, sales divisions, etc., , 11. It is complimentary to standard costing and budgetary control and can be used along with them to yield better results.
Page 18 :
To be continued
